Question

g Julio is the sole shareholder of a corporation he formed seven years ago by contributing $500,000 for all of the corporation's stock. This year, he sold all of the stock to a competetor for $100,000,000. Julio's marginal tax rate is 37%. Julio must recongize a gain of $ 99500000 . His tax liability will increase as a result of the gain by $ 0 .

Answer 1

Julio

Therefore, Julio's tax liability will increase by $19,900,000

Step-by-step explanation:

a) Data and Calculations:

Investment in corporation stock = $500,000

Period of investment = 7 years

Sales proceeds from investment = $100,000,000

Marginal tax rate = 37% (short-term and ordinary)

Julio's gain = $99,500,000

This is a long-term capital gain and will be taxed at 20% and not 37%

Therefore, Julio's tax liability will increase by $19,900,000 ($99,500,000 * 20%) as a result of the gain.

b) According to the IRS, long-term capital gain this year is taxed at reduced rates, usually 15% or 20%, depending on the taxpayer's income bracket. Since Julio's gain is a long-term capital gain, it will be taxed at 20% and not at his ordinary marginal tax rate of 37% for short-term capital gains.